What is an inverted yield curve?

“Welcome to another edition of Better Informed.

You may have heard in the news over the last week the words “Inverted yield curve” and thought to yourself ‘What does that actually mean?’. It’s something that’s had market spooked across the world in the last 7 days and we’ve received a couple of questions from customers and followers about it. I’ve got 4 questions that have come to me over the last few days: 

What does the inverted yield curve actually mean?

Does this mean there will be a recession in the US?

What does it mean for the UAE property?

If I’m looking of thinking of buying now, what should I do?

Let’s just run through those quickly.

What is an inverted yield curve?
 

Possibly something you haven’t heard about until 6-7 days ago. Well, the inverted yield curve is simply put yield return that investor will get on the government bond. Under normal circumstances, you’ll expect a better return, a higher return on a long-term government bond than the short-term because simply you’re locking your way your money for longer. An inverted yield curve means that the short-term yield the short-term bond return is higher than long term and that’s happened because investors have piled into long-term bonds.

Why? Well again, simply put it’s because investors have been looking for a safe haven. A safe haven as an asset in uncertain times. And probably the two classic safe haven and assets are gold and long-term US government bonds.

Now, why is that? Why is there uncertainty in the market at the moment? Well, a number of reasons but probably the most pressing reason is the USA and China trade war that we’ve been hearing about.

Does this mean there will be a recession? 

Well, an economist will tell you that every recession in the last 40 years has seen an inverted yield curve as a precursor to the recession. But it doesn’t mean that every time we’ve seen an inverted yield curve there has been a recession. There have been many many blips and I would hope that this is a blip.

That said I don’t have a crystal ball, I can’t see the future and nobody can. What I would hope and what would I expect is that China and the US do come to an agreement and arrangement with regards to trade and there are signs within the last 48 hours that are looking again more likely that some markets have recovered.

What does it mean for the UAE property? 

Well, as I say if it is a short-term very little at all. However, the growing uncertainty in the US actually may have a couple of positive impacts on us here in the UAE. Firstly, ease in monetary policy, alluring of interest rates in the Fed is more likely now turn to low-interest rates here in the UAE as we going to September-October. That’s good for borrowers, that’s good for the economy as a whole as more people have a little bit more money in their pocket.

We may also see a slight softening of the dollar over the coming months with uncertainty in the US and potentially lower interest rate. That again could be positive for us as a lower dollar price and a lower dirham price is positive for investment into the UAE, particularly to properties. So again there could be some very positive news that can impact us here in the UAE. 

What should you do if you are thinking of buying? 

Well, very personal question, it really depends on you and your circumstances. What I would say is we have now seen 8 or 9 months of month-on-month growth in the number of buyers registering with us showing interest in looking to buy. That’s both from domestic and international investors and for many users, more and more people simply wake up to the value that can be found in UAE property here today. The next couple of months could see a slight fall in interest rates which again would be a positive for buyers. But what I would say for those who are thinking they may be waiting a fall in interest rate, mainly fall in the dollar is likely to bring more buyers back and increase the competition that you face if you’re out there looking to buy.

What’s my advice? Well simply if you are in the position to buy now, I’d be looking to buy now. There are some incredible deals out there and I think buyers out there in today’s market can find themselves some great bargains and I wouldn’t wait.

I hope that’s been of interest. I hope that’s not being too leggy or too heavy on the economic side of things. Please join us again and have a great day!”

Richard Waind

Group Managing Director